Suppose you, Joe Citizen, were in charge of America, USA Ltd. You are trading with a growing emerging nation, China. You become aware that the Chinese are manipulating their currency, by massive purchases of U.S. dollars, to keep their renminbi exchange rate undervalued, making their exports very cheap for Americans paying in dollars and your, America’s, exports, very expensive for them.

Now, the Chinese do this openly. You cannot buy huge amounts of U.S. Treasury bonds in secret. And unlike many other things, they openly disclose their holdings of U.S. dollar assets, every month. The above graph shows China’s U.S. dollar reserve holdings, dating back to 1994.

Now, here is the $64 trillion question. Viewing this graph, which you Joe Citizen religiously track, monthly, when would you become alarmed that China was screwing you, USA Ltd.? When would you sense that they are manipulating the exchange rate? In 2004? 2006? 2008, when reserves reached $1.5 trillion?

When did America itself raise the alarm? Indeed, have they? When would an ordinary person, seeing this graph, raise hell about currency manipulation? And why indeed is Clyde Prestowitz absolutely correct, when he titled his latest book The Betrayal of American Prosperity?

How China Taxes Its Workers Without Taxing Them: New Insight on the Downsized Yuan

By Shlomo Maital

..

Reuters global editor Christia Freeland has made a brilliant observation in her NYT column (Capitalism in China: Irony is gone), Friday April 29, p. 2. China’s policy of consistently undervaluing its currency, the yuan (renminbi, or in Mandarin, ‘money of the people’) is simply a subtle way to tax the workers. She bases her observation on a talk by George Soros, who said at a conference,

“the undervalued currency was a form of transferring purchasing power (wealth) from the citizens to the government without imposing taxation”.

How does this work?

Today one yuan is worth about 15 U.S. cents, or 6.49 yuan per dollar. Its true, purchasing-power value, is about 30 cents, or 3.33 yuan per dollar. How do we know? If you bought items on a shopping list in Beijing, for 1,000 yuan, in America those same items would cost about $300. So China has a permanent half-price sale (if you pay in dollars). To maintain this exchange rate, the Chinese government has to buy billions in U.S. dollar assets, to support the dollar. It already has accumulated some $2.5 trillion!

But why? It is not solely to sustain China’s export-driven growth model. As Soros explains, when the yuan is undervalued, Chinese imports cost twice what they should, so ordinary people pay double for imported goods. Who gains? The government. Why? Because the government accumulates huge amounts of wealth, in buying up cheap dollars, and some of this wealth supports the top government officials. The undervalued yuan is a huge tax, hidden, on the workers of China, justified as a pro-export policy, but probably sustained by the fact that it further strengthens, enriches and entrenches the central government and its officials.

Chinese workers’ standard of living would rise dramatically if the yuan rose to 3.33 per dollar. But the governments’ wealth accumulation, and hidden tax, would disappear. So don’t hold your breath waiting for a rapid yuan appreciation. It won’t happen. As Adam Smith, noted, there are passions and there are interests. The interest of China’s officials and leaders is to sustain their hidden tax. Until that interest changes, China’s yuan will remain overvalued.

Renminbi “money of the people”, it turns out, is anything but. Like many things in China, the word renminbi is a bitter irony.

Howard Schultz, who will turn 58 on July 19, is the legendary founder of Starbucks. After driving his startup to reinvent the concept of coffee (not just coffee, but ‘a third place’, outside home and work) and to achieve rapid growth, he turned over the reins of management to Jim Donald in 2005 – and had to return in 2008 when Starbucks stumbled. In 1987 Starbucks had 11 stores and 100 workers; at its peak it had 17,009 stores in 50 countries.

In a revealing interview in McKinsey Quarterly (2011, no. 2, p. 34), based in part on his new book Onward: How Starbucks Fought for Its Life without Losing Its Soul, Schultz tells all. Here are some excerpts about lessons learned:

1. Stop ‘comps’. Comps are comparisons of same-store sales, period-to-period, data demanded by Wall St. analysts, to reflect true growth of revenue without including the newly opened stores. Schultz found Starbucks store managers were driving up revenues any way they could, because they were measured and in some cases compensated, for their ‘comps’. Schultz halted use of ‘comps’ soon after returning in 2008. “We made decisions driving incremental revenue, not the brand equity”, he explains. Meaning: we sought money, not value and meaning. Lesson: Be careful what you measure! Is your ‘measure’ eliciting the desired behavior?

2. Build a new business design. Schultz is now trying to build a Starbucks brand sold in supermarkets and other retail outlets, while maintaining Starbucks’ own 17,000 stores. “Integrate ubiquitous channels of distribution with the retail footprint”. This is hard. Why should Wal-Mart sell Starbucks brands when Starbucks itself competes with it? This is based in part on the Starbucks card, which does 1 in all 5 Starbucks store transactions, and a reward system between the wholesale and retail channels.

3. Think Local, Act Local. China has 140 cities with over one million people! Starbucks is focusing on China. To do so, it will have to be very very local – black sesame muffins, rather than blueberry muffins, for instance. Far more new products will have to be invented locally, and not in Seattle headquarters. Starbucks has stumbled on its local message. Its 9 stores in Israel were closed in 2003, because local Israeli café chains were simply far superior. “We want to put our feet in the shoes of our customers,” Schultz says. Astonishing how great companies forget this simple lesson, again and again and again, and plunge into chaos.

4. Talent is the real constraint. What keeps Starbucks from growing? Not finance (it has $2 b. in cash) but management talent. And this shortage will worsen, as baby-boomer managers retire. Schultz wants to hire world-class people. He should also focus on how he will build such talent internally. Hired top talent tends to be mobile, leaping from firm to firm.

5. Discipline and creativity. Schultz seeks “real quantitative metrics to study the investments that we’re making across the board…– return on investment in stores, in advertising, new-product introductions, entry cost to new markets”. In other words: Make the lion of discipline lie down with the lamb of creativity. Schultz is keenly aware that such metrics – “comps” – ruined Starbucks’ value focus. The same issue of McKinsey Quarterly has a short piece about HR – how to use HR analytics as the basis of training programs. Measurement is not just technical, it is strategic – and often, badly managed.

Every global company grapples with this discipline/creativity paradox. Will Starbucks succeed? Stay tuned.

MIT Media Lab, the place that invents the future and combines academic research at the Ph.D. level with amazing gadgetry, has appointed a new head. Among other things, the MIT Media Lab invented Eink (used in Kindle), Aspen Movie Map, a forerunner of Google Street View, and the $100 Laptop.

The new appointee is Joichi (Joi) Ito, and he dropped out of Tufts Univ. and Univ. of Chicago because of sheer boredom. His formal credentials, therefore, are lacking – amazing, since the MIT professors, rector and President who make the appointment would normally seek someone with academic credentials.

Ito, as a VC, helped fund Flickr, Last.fm and Twitter, helped establish Japan’s first Internet service in 1994, and is chair of Creative Commons, which seeks to promote sharing of digital information. He is a board member of Mozilla Foundation.

This is a brilliant appointment, and closes a circle. When Nick Negroponte founded the Media Lab in 1985, he had a clear and simple vision. He drew three circles: computing, entertainment, publishing. These circles will converge, he said, though today they are separate. MIT Media Lab will explore the future of this convergence. American firms did not get what he said. They refused him funding. But Japanese firms came through at once. They wrote a check for $10 m. Negroponte was attacked for delivering American innovation to its Japanese competitors. But, hey – put your money where your mouth is. So Joi’s appointment is entirely appropriate, though he is as much American today as he is Japanese. A recent Media Lab Associate head, John Maeda (“Laws of Simplicity”), who is Japanese-American, left recently to head RISD, Rhode Island School of Design.

A slow stroll through building E15 on MIT’s campus, which is the Media Lab, is amazing. You will see incredible gadgetry in kitchens, computers, toys, and music. Yet all of this is supported by rigorous academic research that is done by doctoral candidates. It is funded by subscriptions – companies subscribe, for about $100,000 a year, just for the first-refusal right to ‘harvest’ ideas and commercialize them.

There were attempts to launch Media Labs in Ireland and Korea. I’m not sure how successful they are. There is something about the MIT campus culture that is infectious and energizing.

Kudos ! to MIT for its unconventional appointment. As I noted in my blog on April 19, titled “avoid innovation professors”, the best most-qualified persons to lead real innovation efforts, and thinking about innovation, are innovators, not professors. Joi will be a huge success.

Let’s run a psychological experiment, based on ‘stream of consciousness’.

Say the word ‘innovation’ out loud.

Say what pops into your mind.

Now – how many of the things that pop into your mind are related to products – or services?

Most? All?

Why?

Innovation is simply creation of novel ideas. Why should innovation be confined to product innovation? The truth is, the most powerful innovations are found in dark corners, where many people do not even bother to look. Here are a few examples:

Process innovation: Research shows that the rate of return on investment in R&D is far far higher for process innovation (innovation on processes that organizations use, such as production, marketing, quality assurance, supply chain management) than for product innovation – because many new product launches simply fail, and yield no return. Apply innovation to everything your organization does. How can it be improved? Process innovation cannot fail! Because – the worst that will happen, is that you use the old process when the new one doesn’t work out.

Business design innovation: In their HBR article, Ramon Casadesus-Masanell and Joan E. Ricart [“How to Design a Winning Business Model”] show that 7 out 10 companies are engaged in business-model innovation, meaning – innovations in the way they do businesses, rather than in the products they make and sell. Part of the motivation is the global business slowdown, the need to shift to emerging markets, and hence the vital necessity to radically alter existing conventional business designs.

Talent management: How does your organization choose, hire and develop talent? As the baby-boomers retire, a burgeoning shortage of talent is developing. Companies who excel at finding and developing talent will have a major competitive advantage. There is much room here for innovation. Conventional HR methods will simply not do.

Marketing: Writing in Market Leader (Quarter 4 2010), John Kearon (founder, CEO and Chief Juicer at BrainJuicer Group) writes provocatively that: “….the adoption of ‘marketing science’ is the reason why large corporations no longer seem capable of creating the kinds of new category innovations that made them big in the first place. ….. it is freedom from the constraints of marketing science that has enabled small startups to innovate and initiate new behaviours”. “The problem with putting the consumer first when it comes to originating new categories is that people instinctively reject new behaviours, and it takes inventors/entrepreneurs to ignore these reactions and do it anyway.”

If your innovation is driven by marketing, as it is in many organizations, perhaps you need to innovate your marketing-R&D link. And while you’re at it, innovate how you market your products.

MBA education: America has 4 million graduate students. Fully one in four, or a million of them, are MBA students! These MBA students study essentially identical curricula, from identical textbooks, case studies and articles. They are cookie-cutter managers. There is a huge need for innovative MBA programs that will generate managers who apply the Apple slogan: Think Different!

Career paths: Today’s MBA grad will need to develop at least 3-4 different careers, over their working lives. There is much room here for innovation, using the ‘adjacent possible’ idea – after excelling in Area A, what could I do, in Area B, which is far enough to be challenging and stimulating but close enough so that I do have a headstart on knowledge, skill and human capital?

The story is told of an economist who drops a $100 bill in a dark alley, then dashes out to the street lamp to look for it. Why? Of course – because that is where the light is. Don’t be like the economist. Look for innovation where others don’t – in dark corners, in places where the light of innovation doesn’t penetrate. You’ll be astonished at the results.

Gene Sharp: Father of the Arab Revolutions? How Ideas Change the World

By Shlomo Maital

Prof. (emer.) Gene Sharp

There are many examples of how obscure books change the world. Marx’s Capital is unreadable – and look what it did. F.A. Hayek’s slim The Road to Serfdom was read by two leaders called Ronald Reagan and Margaret Thatcher – and each dragged their countries toward free-market capitalism.

But few have heard of Gene Sharp, a retired American political scientist professor, Univ. of Mass., whose 93-page 1993 book on how to topple autocrats, From Dictatorship to Democracy, has become the Bible for revolutionaries from Bosnia to the Ukraine to Egypt’s Tahrir Square. Sharp offers 198 practical ways for ordinary citizens to use non-violence to bring down dictators. Available in 30 languages, Sharp’s slim book has a simple proposition.

“I have tried to think carefully about the most effective ways in which dictatorships could be successfully disintegrated with the least possible cost in suffering and lives. In this I have drawn on my studies over many years of dictatorships, resistance movements, revolutions, political thought, governmental systems, and especially realistic nonviolent struggle. “

According to Ruaridh Arrow, who has prepared a documentary film on Sharp soon to be released (speaking on the BBC): “Gene Sharp is the world’s foremost expert on non-violent revolution. His work has been translated into more than 30 languages, his books slipped across borders and hidden from secret policemen all over the world. As Slobodan Milosevic in Serbia and Viktor Yanukovych in Ukraine fell to the colour revolutions which swept across Eastern Europe, each of the democratic movements paid tribute to Sharp’s contribution, yet he remained largely unknown to the public. The Serbs who had used his books as a theoretical base for their activities founded their own organisation called the Centre for Applied Non Violence (CANVAS), and alongside their own materials have carried out workshops using Sharp’s work in dozens of other countries. When I met Srdja Popovic the director of CANVAS in Belgrade in November he confirmed that they had been working with Egyptians. ‘That’s the power of Sharp’s work and this non-violent struggle,” he says. “It doesn’t matter who you are – black, white, Muslim, Christian, gay, straight or oppressed minority – it’s useable. If they study it, anybody can do this’ .”

In Iran, the Ahmedinajad regime officially accused demonstrators of applying 100 of the 198 Sharp dictums.

Arab revolutionaries are of course reluctant to admit that an American professor has guided their revolutionary organizations. But his 198 step plan is remarkably practical, for a professorial scholar. Sharp’s passion, to remove autocrats without bloodshed, has changed the world. His 199th recommendation, however, is missing – how to deal with bloody tyrants like Syria’s myopic ophthalmologist Bashir Assad, who simply shoot demonstrators in cold blood, and then murder them again when they assemble to bury their dead.

We management educators encourage creative innovators to think big. Sometimes, it’s best to think small, think fast – and think ‘bootstrap’ (how can I do this without investors?). Here is a case study, based on Jenna Wortham’s piece in the New York Times (April 22/2011, p. 15):

Dave Petrillo and David Jackson are friends, and mechanical engineers, from Pennington, NJ. They had an idea. Ever find that your Starbucks coffee was too hot to drink? Or worse, you drank it and burned your lips? Well, they did. But, what’s the solution? Steam is hot, and you need steam to force through the coffee grounds. How about bean-shaped stainless steel shells, called Joulies (a joule is a unit of energy, named after a British physicist), filled with a heat-absorbing gel, that go into the coffee cup and cool the coffee just enough, but not too much, and can be reused. The two friends scraped together $3,000, built 100 prototypes by hand in Petrillo’s parents’ basement. They found a helpful process on You-Tube, on a silverware factory in upstate NY: apparently making knife handles is similar to making Joulies.

How did they scale up their imaginative idea? Instead of spending frustrating months courting arrogant VC’s, they went to Kickstarter, a NY startup that lets people present sales pitches to ordinary people who might invest small sums in a creative startup. They created a 3-minute video for Kickstarter, offering five Coffee Joulies to anyone who gave them $40. They raised…$177,000, in just a few weeks, and the total is rising.

What can we learn from this little story? At least five lessons:

1. Think small. No need is too small to build a business on, provided you can satisfy it well, feasibly, efficiently, and creatively. Often your own need is a great place to start. Unless you are totally unique, others probably have the same want and need.

2. Build prototypes. Until you do, you cannot test the market.

3. Think fast! If you dally, others will beat you to the punch. Imagine Yankee Stadium full of inventors trying to come up with the same thing you are.

4. Bootstrap. There is a major scarcity of venture capital these days. Use the tiniest amount of cash you can, and be creative about finding ‘angel’ investors, who are not VC’s. Use the 2008 Obama election campaign approach – raise small sums from many investors. Make a You-Tube video, a short one.

5. Democratize! According to the NYT article, “shoppers are increasingly looking for a more intimate connection to the creators and the sources of the things they buy”. Get your fans and potential buyers to help finance your ideas.

Social Websites are making innovation a lot easier and faster, especially for those who think fast, small and bootstrap. Why not try it?

There is a legend about George Washington, that he chopped down a cherry tree, and then, when his father queried him about it, admitted doing the deed, saying “I cannot tell a lie!”. Naturally historians have cast doubt on the story. They miss the point. The fact that the story resonated throughout American history, and was told and retold, becoming part of American culture, is far more important than whether it really happened.

After a lengthy investigation by the U.S. Senate Permanent Subcommittee on Investigation, led by Senator Carl Levin, it is clear that while Goldman Sachs sold mortgage-backed securities short, and profited enormously from the 2007-9 global crisis, they consistently denied doing so. “We didn’t have a massive short against the housing market”, Goldman Sachs CEO Lloyd Blankfein told Congress. Yes, Lloyd, you did. You chopped down the cherry tree, and then denied it. What is hard to understand is why Goldman Sachs continues to deny turning the cherry tree into wood shavings. Isn’t it preferable to be seen as super smart, ahead of the curve, able to anticipate trends others cannot? Why is Goldman Sachs playing dumb?

According to the Senate subcommittee, they found the phrase “net short” (meaning, a position in which Goldman Sachs has sold more of an asset than they actually own) some 3,400 times, according to Andrew Ross Sorkin, writing in the Global NY Times (Wed. April 20, p. 18). Goldman Sachs wrote to the Securities Exchange Committee, in a letter, that “during most of 2007 we maintained a net short subprime position and therefore stood to benefit from declining prices in the mortgage market”.

Thanks, Goldman Sachs. What the Senate report does not say, is that you not only shorted the subprime market, you kept this a closely guarded secret – because if the rest of us had found out, we might have done the same, and then the cat would have been out of the bag. Your profits would decline, and perhaps the eventual collapse might have been precipitated earlier, and hence been much less disastrous.

For Goldman Sachs, 2007 was a record year because of its mortgage department. This, while everyone else was losing their shirt.

Take a bow, Goldman Sachs! You put one over on us. And now, by denying you vaporized the housing cherry tree, you are doing it again.

Why will anything Goldman Sachs says never be credible again? George Washington knows.

David Beers, S&P sovereign debt rating head, announced on Monday that “there is a risk of one in three, that within two years the rating of U.S. Government bonds will be lowered to AA from AAA”. Within 30 minutes of this ‘alert’, the Dow Jones Stock Index dropped 200 points and stock prices fell all over the world. It was the first time S&P had issued such an alert – note, it’s an ‘alert’, not an actual downgrade – since the Japanese bombed Pearl Harbor in 1941.

S&P stands for Standard & Poor. It is one of three major bond-rating agencies, the others being Moody’s (which has Warren Buffett as an investor) and Fitch. Neither of these two will change their AAA rating or even issue an alert. Both experts and the general public have a very dim view of all three of these agencies. With the big banks as their main clients, they totally missed alerting us to the dangers of mortgage-backed bonds, backed by junk mortgages, until those bonds went into default in many cases. Now S&P seeks to regain some credibility by warning it might downgrade US Treasury Bonds. Its effort is Substandard and Political.

Many regard Beers’ “alert” as political, in support of the Republican effort to slash government spending. Republicans and Democrats remain divided on whether to cut the huge deficit by higher taxes or by lower spending.

Frankly, S&P’s alert is ridiculous. America will never default on its US Treasury Bonds, and the bond market still regards them as the gold standard; immediately after Beers’ announcement, US bond prices went up, not down. What is true is that America Inc. is a business, one that is very badly run. Among all the nations with debt crises, only the U.S. has no real emergency debt-reduction plan. (Japan too lacks one; but it is grappling with its disastrous earthquake). On May 16, the US Govt. will reach its debt ceiling of $14.294 trillion ! If Congress fails to approve raising the statutory debt ceiling, the government will not be able to pay its bills.

There are strong signs that worldwide, inflation is rising. China in particular is troubled by it, and is tightening bank credit as a result. A scenario far more plausible than S&P’s “one in three” probability of a Treasury bond downgrade is that America will passively let inflation degrade the real value of its debt. This is how nations typically evade debt. Meanwhile, the 2011 deficit of 1.6 trillion dollars is staggering, but will decline sharply in future years. Only 19 out of 127 sovereign nations whose bonds are rated by S&P get AAA; the U.S. is probably still the safest of the 19.

Roiling global markets, and making political statements, is not the mission of S&P. Let them stick to their knitting, providing us with transparent information so informed investors can make their own judgment. The enormous pressure on S&P to bestow AAA ratings (a precondition for many pension funds to buy them) will forever make us skeptical about anything S&P says or does. In the end, as with everything, it’s all about money.

In their latest Bloomberg Business Week innovation blog, Michael Maddock and Raphael Vitón caution against an alarming trend: the wrong people are making millions on teaching innovation – the professors. And I are one!

Here is their argument. Professors teach innovative risk-taking while themselves picking a safe, popular topic (innovation). Professors teach a highly pragmatic life-based experience-based evidence-based subject, without themselves having done it first hand. (“If you can, do; if you can’t, teach!”, said Shaw). Professors teach organizations how to create an innovation template, a button-down bureaucratic system that can kill innovation like warfarin kills rats. Companies (especially large ones) are already risk-averse; professors of innovation tend to strengthen that tendency, rather than battle it.

“We …. coach people to accommodate, even encourage, the fast-failures and messiness that ironically make great ideas happen most efficiently,” the authors say. Fail early to succeed faster, goes the IDEO principle. Professors of innovation do not teach organizations to welcome failure.

“So, instead of writing a six-figure check to go over a decade-old case study with a professor, who of course did not put his house on the line to back a big idea he had (like teaching innovation), what specifically should large companies learn from entrepreneurs?” The authors have three suggestions: a) get to ‘beta’ quickly. Experiment constantly. Recall Edison’s principle, that 10,000 failures were not failures but preparation for success in the 10,001th try. b) grab ideas from anywhere and everywhere. Professorial innovation processes tend to focus on internal idea generation. c) acknowledge, if you are elephantine, that mice are more agile, and acquire one. Buy a startup, give it room, air to breath, freedom to fail, and then turn it loose, and harvest its ideas.

Personally: I taught innovation for four decades, before actually plunging in to involvement with a startup. I’ve now been connected with two of them. It’s a great relief. I no longer feel like a fraud, when teaching students about how to generate ideas and launch them as businesses.